March jobs data weakens case for multiple rate cuts, but May 1 cut still expected: Economists – RBA rates decision countdown

The better-than-expected unemployment result in March has weakened the case for multiple rate cuts, but economists are still tipping the Reserve Bank to reduce the cash rate by 25 basis points when it meets on May 1.

BT Financial Group’s chief economist Chris Caton says the jobs numbers are very important to the RBA and says the case for a rate cut in May has weakened, though it could still happen.

“For some time, I have had the view that a clear upward trend in unemployment would be the most likely catalyst for a further rate cut,” Caton told the Australian Financial Review.

UBS chief economist Scott Haslem reached similar conclusions.

Haslem says the March quarterly inflation number (due on April 24) would be low enough to encourage the RBA to cut rates on May 1 but says the prospect of a follow-up June cut is now more widely questioned.

Currently interest rate markets are pricing in only one interest rate cut in the next three months, down from expectations of two rate cuts over the quarter earlier in the month.

Unemployment remained at 5.2% in March, when most economists were tipping to rise to 5.3%.

The stronger-than-expected jobs numbers pushed up the Australian dollar against the US dollar, rising half a cent to $1.03 yesterday and continuing the gain today, currently trading around $1.043.

The data showed 44,000 jobs were added to the national economy during March, well above economists' expectations for an increase of 5,000 jobs, while the participation rate (those employed or actively seeking work) rose modestly from 65.2% to 65.4%.

Unemployment rose in Victoria from 5.5% to 5.8% and Western Australia (3.9% to 4.1%) but dropped in NSW (5.1% to 4.8%) and Queensland (5.7% to 5.5%).

Tasmania has the highest unemployment rate of 7%, which remained unchanged during March.

In its assessment of the unemployment data, Westpac says the numbers show that the labour market appears to have stabilised in NSW but it has entered a new downturn in Victoria as the jobs losses in construction and manufacturing start to mount.

“Jobs growth is picking up in the mining states but as Qld continues to disappoint it is interesting to note over the last six months WA has created a total of 29.6,000 jobs while NSW, Vic and Queensland combined has only been able to add a total of 10,200 jobs,” says Westpac.

Commonwealth Bank interest rate strategist Phillip Brown expects the RBA to go ahead with its rate cut, but says the jobs data means there is now less prospect of the RBA embarking on a series of rate cuts

"It's a bit hard to tell the internal thoughts of the RBA board members, but we don't think this is going to change their action in May," Brown says.

However, CommSec economist Craig James called the March jobs data “murky” though at first glance they might appear “heartening.

He also disagreed that the jobs numbers would be as closely watched as other economists claim and said global factors were still more important.

“The jobs data is unlikely to make waves at the Reserve Bank. Rather the central bank will be more focused on the current situation in Euro Zone and even the slowdown in China.

“Any escalation of the Euro Zone debt crisis is likely to prompt the Reserve Bank to move sooner rather than later when it comes to rates,” he says.

James says the unemployment results needs to be put into perspective.

“The latest March result follows the modest fall in employment in February and a more sizeable fall December. In fact, over the past five months employment growth has totalled just 36,400 positions – or around 7,000 jobs a month.

“The month-to-month data can certainly be volatile. However, even a smoothed longer-term view confirms the sluggishness in the labour market. Employment is barely growing having recorded an anaemic annual growth rate of just 0.3%,” he says.

James also highlights that business conditions would not improve for many sectors of the economy.

“From a business perspective there is no doubt that trading conditions will remain difficult and profitability continue to be affected.

“In addition the strength of the Australian dollar will continue to cripple manufacturing, tourism and exports outside the resources space. As a result it is more likely that businesses will hold onto current staff rather than significantly adding to their workforce,” he says.

In it is April Market Insights report, released on April 4 ahead of the unemployment data, Westpac said it was disappointed that the RBA “continues to talk about little change in the unemployment rate” and said there were dangers in only relying upon the unemployment rate as a measure of labour market conditions.